Systemic Risk and Stability in Financial Networks
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Ozdaglar_Systemic risk.pdf
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Author(s)
Acemoglu, Daron
Tahbaz-Salehi, Alireza
Ozdaglar, Asuman E.
Date Issued
February 2015
Journal
American Economic Review
Publisher
American Economic Association
Citation
Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. “Systemic Risk and Stability in Financial Networks.” American Economic Review 105, no. 2 (February 2015): 564–608.
Version
Final published version
Abstract
This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
Massachusetts Institute of Technology. Laboratory for Information and Decision Systems
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/aer.20130456
